[phil_20686]

Winstonm, on Oct 23 2009, 08:06 PM, said:

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Hehe, i think this is part of the basterdisation you are referring do, the laffer curve is about how much revenue the goverment can collect in the short term, i.e. if they tax too much then people avoid paying taxes or simply don't work as much. It is not about the long term link between taxes and growth.

The Laffer curve is simply about an optimal tax rate - as I said. I do not know what you are smoking to come up with your description, but it sounds like it is straight out of the mouth of Rush in one of his Reagan fantasies.

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The Laffer curve is an economic concept used to illustrate the theory that increases in the rate of taxation do not necessarily increase tax revenue. The basic assumption is that both a 0% income tax rate and a 100% tax rate will generate no revenue. An optimal tax rate is therefore assumed to lie somewhere in between

"An optimal tax rate is...somewhere in between."

This is completely wrong.

You are defining optimal tax rate as the rate that collects the most revenue now. This is a very poor definition for optimal tax rate.

Let us say that this year the total ecomomy has value 1. Let us take a simple model where if i tax at 50% i will get 5% growth, and if i tax at 25% i will get 10% growth. Obviously this year i will get twice as much revenue by taxing twice as much, but after ten years my revenue streams will be:

0.5*1.05^10 = 0.81
and
0.25*1.10^10 = 0.65

and after a hundred years the answers are

65.7
3445

So by taxing less my revenue in the future will be 5 times more. This is typical behaviour for a power law, it will always overtake the extra you get from a higher linear fraction now. Thus the optimal tax rate should be the one which maximises growth, rather than the one which provides the most money now [which is what the lafferty curve is all about].

Let me repeat this:
The lafferty curve says nothing about the long term optimisation of revenue. It only makes a relation between tax rate now, and revenue now. The optimal revenue strategy over an infinite time period is always the one when maximises growth.

[luke warm]

phil_20686, on Oct 26 2009, 02:30 PM, said:

Let me repeat this:
The lafferty curve says nothing about the long term optimisation of revenue. It only makes a relation between tax rate now, and revenue now. The optimal revenue strategy over an infinite time period is always the one when maximises growth.

taking you at your word here, what does that mean re: so-called supply side economics?

[Winstonm]

Jimmy,

I don't know if this will help but it is from Oct 2009 by Bruce Bartlett, who helped construct the original Reagan tax cuts.

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During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, fromgovernment spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents BigGovernment while they support the latter because it is a "tax cut."

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Many of my friends believe I have abandoned supply side economics and become a Keynesian. (Among conservatives there are few insults more damning than to be labeled a "Keynesian.") But as I try to explain in my book, my views haven't changed at all; it's circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggesteconomic problem . Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don't understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it's simply become dogma totally disconnected from reality.

Nor do I understand the conservative antipathy for Keynes, who was in fact deeply conservative. He developed his theories primarily for the purpose of saving capitalism from some form of socialism. Same goes for Franklin D. Roosevelt, whose biggest economic mistake, I believe, was not that he ran big budget deficits, as all conservatives believe, but that he didn't run deficits nearly large enough until the war forced his hand.

It is good to heara conservative point of view that is thoughtful and doesn't automatically spout ideological nonsense.